In our ever more cashless world, it is easy to overlook the real cost of the purchases we make. We simply swipe our credit cards and write the check at month’s end without much consideration (although often with some astonishment!). Due to a schedule conflict my wife recently had to have her monthly cut and color done at a big name salon versus the neighbor who works from her home. Instead of the normal $50 cost, the price was $120. This prompted me to wonder: Just how much does that haircut really cost?

            For the patron, one might say simply $120. From my perspective, this is not entirely accurate. Not much of our money comes to us tax-free. For those paying 35% in total income taxes (Federal, state and Social Security), it actually takes $184 of income to pay for the $120 haircut.  A person making $100,000 per year for example, will work nearly 4 hours to pay for that haircut. And what about the stylist? I was not surprised to learn that stylists in the larger salons often get only about half of the total charge. In this case, she is left with $60. But again, that $60 will be taxed as income putting a net of about $40 in the stylist’s pocket. This was a fascinating realization: $184 of income from the patron results in $40 net for the service provider with the remainder being absorbed by taxes and overhead. That is nearly 80% in frictional expenses!

            Somewhat fascinated at this idea, I began to wonder: if this is what a haircut really costs, then what about larger purchases such as a home? This is a bit trickier but by my calculations, each $100,000 of mortgage debt at 4% for 30 years will lead to a total of $171,900 in principal and interest payments. Again at 35% income taxes, that means that over $264,000 in income is required just for the mortgage, never mind the property taxes and all else. Stated differently, each dollar of home purchase price will require 2.5+ dollars of income for debt service. With this in mind, a $250,000 home will absorb over $600,000 in income over the course of 30 years with the  difference being the frictional costs of income taxes and interest. For our $100,000 wage earner, this means 6 years of work/income will be the base cost of that home. Truly something to consider!  And, I will admit that we own our home, however, we chose to live in a modest home, purchased in late 2009 when prices were bottoming. Bottom line: don’t underestimate the effects of frictional costs in the purchases we make.

Market Update

            We have been experiencing a very different market since quantitative easing ended last fall. Volatility has been higher as stocks have chopped up and down in the absence of the Fed’s buying pressure. Events around the world are taking their toll, too. The ongoing Greek drama weighs on foreign and domestic stocks. A large default on Grecian debt is a deflationary concern for many. China is also showing signs of trouble. Its stock market is plunging with a reported 25% of stocks that have halted trading to stem the tide. I recently saw a report that Chinese officials are barring certain investors from selling stocks for 6 months. The situation does appear precarious from our vantage point. For us, this means we will likely see continued choppiness in the financial markets for the coming weeks/months. Some pundits predict another round of financial stimulus by central banks is needed. Others claim an impending “perfect storm” in which stocks, bonds and commodities all plunge in unison. In the end, it is merely speculation and crystal-ball gazing.  What is clear to me is that the smooth sailing of 2012-14 is over for now. We will continue to keep our exposure light and manage risk accordingly.

Book Recommendation

           Those of you who know me well know that I am a bit of book junkie. I love reading books on a variety of subjects. In spite of having plenty of shelf space, I periodically need to “clean house” to make room for the next wave of reading. Suffice it to say, I read a lot of books. With this in mind, I thought some of you might appreciate periodic recommendations. Many of you are quite busy so when you do have time to read, you surely want it to be something worthwhile.

            I recently finished reading “Better than before—Mastering the habits of everyday life” by Gretchen Rubin. Gretchen is a former attorney turned author and blogger. She has focused much of her research and writing on the subject of happiness. I found this an interesting focus for a person with her background. As it turns out, Gretchen’s talents for research and critical thought make her well-suited for distilling large amounts of information into useable insights. Better Than Before is a remarkably helpful book regarding our individual characteristics and how we really need to know ourselves in order to master our behaviors. I found this book most enjoyable to read while presenting some great tools to improve important aspects of my own habits as well as my life.

 Paul Kluskowski